GitHub is building a coder’s paradise. It’s not coming cheap

Though the name GitHub is practically unknown outside technology circles, coders around the world have embraced the software. The startup operates a sort of Google Docs for programmers, giving them a place to store, share and collaborate on their work. But GitHub Inc. is losing money through profligate spending and has stood by as new entrants emerged in a software category it essentially gave birth to, according to people familiar with the business and financial paperwork reviewed by Bloomberg.

The rise of GitHub has captivated venture capitalists. Sequoia Capital led a $250 million investment in mid-2015. But GitHub management may have been a little too eager to spend the new money. The company paid to send employees jetting across the globe to Amsterdam, London, New York and elsewhere. More costly, it doubled headcount to 600 over the course of about 18 months.

GitHub lost $27 million in the fiscal year that ended in January 2016, according to an income statement seen by Bloomberg. It generated $95 million in revenue during that period, the internal financial document says.

Sitting in a conference room featuring an abstract art piece on the wall and a Mad Men-style rollaway bar cart in the corner, GitHub’s Chris Wanstrath says the business is running more smoothly now and growing. “What happened to 2015?” says the 31-year-old co-founder and chief executive officer. “Nothing was getting done, maybe? I shouldn’t say that. Strike that.”

GitHub recently hired Mike Taylor, the former treasurer and vice president of finance at Tesla Motors Inc., to manage spending as chief financial officer. It also hopes to add a seasoned chief operating officer. GitHub has already surpassed last year’s revenue in nine months this year, with $98 million, the financial document shows. “The whole product road map, we have all of our shit together in a way that we’ve never had together. I’m pretty elated right now with the way things are going,” says Wanstrath. “We’ve had a lot of ups and downs, and right now we’re definitely in an up.”

Also up: expenses. The income statement shows a loss of $66 million in the first three quarters of this year. That’s more than twice as much lost in any nine-month time frame by Twilio Inc., another maker of software tools founded the same year as GitHub. At least a dozen members of GitHub’s leadership team have left since last year, several of whom expressed unhappiness with Wanstrath’s management style. GitHub says the company has flourished under his direction but declined to comment on finances. Wanstrath says: “We raised $250 million last year, and we’re putting it to use. We’re not expecting to be profitable right now.”

Wanstrath started GitHub with three friends during the recession of 2008 and bootstrapped the business for four years. They encouraged employees to work remotely, which forced the team to adopt GitHub’s tools for their own projects and had the added benefit of saving money on office space. GitHub quickly became essential to the code-writing process at technology companies of all sizes and gave birth to a new generation of programmers by hosting their open-source code for free.

Peter Levine, a partner at Andreessen Horowitz, courted the founders and eventually convinced them to take their first round of VC money in 2012. The firm led a $100 million cash infusion, and Levine joined the board. The next year, GitHub signed a seven-year lease worth about $35 million for a headquarters in San Francisco, says a person familiar with the project.

The new digs gave employees a reason to come into the office. Visitors would enter a lobby modeled after the White House’s Oval Office before making their way to a replica of the Situation Room. The company also erected a statue of its mascot, a cartoon octopus-cat creature known as the Octocat. The 55,000-square-foot space is filled with wooden tables and modern art.

In GitHub’s cultural hierarchy, the coder is at the top. The company has strived to create the best product possible for software developers and watch them to flock to it. In addition to offering its base service for free, GitHub sells more advanced programming tools to companies big and small. But it found that some chief information officers want a human touch and began to consider building out a sales team.

The issue took on a new sense of urgency in 2014 with the formation of a rival startup with a similar name. GitLab Inc. went after large businesses from the start, offering them a cheaper alternative to GitHub. “The big differentiator for GitLab is that it was designed for the enterprise, and GitHub was not,” says GitLab CEO Sid Sijbrandij. “One of the values is frugality, and this is something very close to our heart. We want to treat our team members really well, but we don’t want to waste any money where it’s not needed. So we don’t have a big fancy office because we can be effective without it.”

Y Combinator, a Silicon Valley business incubator, welcomed GitLab into the fold last year. GitLab says more than 110,000 organizations, including IBM and Macy’s Inc., use its software. (IBM also uses GitHub.) Atlassian Corp. has taken a similar top-down approach with its own code repository Bitbucket.

Wanstrath says the competition has helped validate GitHub’s business. “When we started, people made fun of us and said there is no money in developer tools,” he says. “I’ve kind of been waiting for this for a long time—to be proven right, that this is a real market.”

It also spurred GitHub into action. With fresh capital last year valuing the company at $2 billion, it went on a hiring spree. It spent $71 million on salaries and benefits last fiscal year, according to the financial document seen by Bloomberg. This year, those costs rose to $108 million from February to October, with three months still to go in the fiscal year, the document shows. This was the startup’s biggest expense by far.

The emphasis on sales seemed to be making an impact, but the team missed some of its targets, says a person familiar with the matter. In September 2014, subscription revenue on an annualized basis was about $25 million each from enterprise sales and organizations signing up through the site, according to another financial document. After GitHub staffed up, annual recurring revenue from large clients increased this year to $70 million while the self-service business saw healthy, if less dramatic, growth to $52 million.

But the uptick in revenue wasn’t keeping pace with the aggressive hiring. GitHub cut about 20 employees in recent weeks. “The unicorn trap is that you’ve sold equity against a plan that you often can’t hit; then what do you do?” says Nick Sturiale, a VC at Ignition Partners.

Such business shifts are risky, and stumbles aren’t uncommon, says Jason Lemkin, a corporate software VC who’s not an investor in GitHub. “That transition from a self-service product in its early days to being enterprise always has bumps,” he says. GitHub says it has 18 million users, and its Enterprise service is used by half of the world’s 10 highest-grossing companies, including Wal-Mart Stores Inc. and Ford Motor Co.

Some longtime GitHub fans weren’t happy with the new direction, though. More than 1,800 developers signed an online petition, saying: “Those of us who run some of the most popular projects on GitHub feel completely ignored by you.”

The backlash was a wake-up call, Wanstrath says. GitHub is now more focused on its original mission of catering to coders, he says. “I want us to be judged on, ‘Are we making developers more productive?’” he says. At GitHub’s developer conference in September, Wanstrath introduced several new features, including an updated process for reviewing code. He says 2016 was a “marquee year.”

At least five senior staffers left in 2015, and turnover among leadership continued this year. Among them was co-founder and CIO Scott Chacon, who says he left to start a new venture. “GitHub was always very good to me, from the first day I started when it was just the four of us,” Chacon says. “They allowed me to travel the world representing them; they supported my teaching and evangelizing Git and remote work culture for a long time.”

The travel excursions are expected to continue at GitHub, and there’s little evidence it can rein in spending any time soon. The company says about half its staff is remote and that the trips bring together GitHub’s distributed workforce and encourage collaboration. Last week, at least 20 employees on GitHub’s human-resources team convened in Rancho Mirage, California, for a retreat at the Ritz Carlton.